Seven Rules for Increasing Customer Value by Don Peppers

8th Jun 2005

Forward-thinking organisations are finding ways to get a true return on the investments they make in their customers. Here’s how.

There’s a new framework for measuring and creating customer value. It’s called Return on Customer (ROC). It urges today’s business leaders to focus on the long and short-term value from the asset that matters most: customers. In developing ROC, we have identified seven rules to ensure its success. Progressive organisations are already employing these strategies to build customer value. Follow these seven rules and you can, too.

1. Always remember that your customers are your scarcest resource.

Competitors can easily under-cut your prices, match your marketing budget, or launch the next great product. What’s difficult is finding and keeping customers. The most successful firms are proactively anticipating customer needs. ING Bank, in the Netherlands, for instance, monitors ATM activities for customers who overdraw their account. If that happens to a customer who is a good credit risk, ING sends a mailing within about two weeks asking if the customer would like to consider a credit line. The program generates a 50 percent response rate.
2. Don’t take actions in the short term that will destroy value in the long term.

The more short-term a company’s focus becomes, the more likely the firm will engage in behaviour that actually destroys long-term value. You need go no further for proof of this than Marsh & McClennan’s March layoff of 3,000 employees, partially as a result of paying out $850 million in penalties for a bid-rigging scheme at the company’s insurance brokerage division. When the tragedy of 9/11 brought change to the brokerage and insurance business, Marsh reacted to a long-term shift in its business model with short-term strategy: variable commission plans that focused more on lining agents’ pockets than providing value to customers. To its credit, Marsh has now revised its business model and pays brokers fixed rates.

3. Balance short-and long-term returns.

Organisations must measure EBITDA, churn rates, and market share, but it’s also crucial to measure and grow customer value, share of customer and customer equity. Short-term earnings are important, but short and long-term returns must be balanced. ROC does that by measuring revenue enhancement and cost reduction as well as the impact of marketing activities on the underlying value of the customer base. ROC is neither long term nor short term. It is a balance of both.

4. Develop trust by viewing your organization from the customers’

To create value you must stand in your customer’s shoes, understand the customer’s needs, and then act accordingly. New Citigroup CEO Chuck Prince recognises this. Last year Citigroup’s reputation was damaged by scandals in its Japanese and German offices. Now the company is fighting to win back the trust of its customers, not to mention its investors. Prince began a campaign in early March to re-establish the company’s reputation, telling top executives to expect annual ethics training for all employees and anonymous appraisal of managers by their employees. But until the company focuses on a balanced approach to value creation, earning the trust of customers will always seem an unnatural act in the executive suite.

5. Treat different customers differently.

Your company must be capable of thinking and acting in a customer-specific fashion across the enterprise.

We found an example of this from Whirlpool’s KitchenAid division. Here’s a category (kitchen appliances) where only 15 percent of consumers have brand preferences. So KitchenAid analysed the 10 million customers in its database, and is now focusing on one particular customer group: the home enthusiast, who thinks brand and quality are important, takes pride in caring for her home, and is passionate about cooking. For those customers KitchenAid created an exclusive program for high-end product buyers.

6. Build both current and future value.

Not only does ROC provide balance between long and short term competitive strategy, it also balances the value of current and future customers. Example: Business Week took Cisco CEO John Chambers to task in its February 28 issue for not being concerned that increasing the size of the company would slow its percentage revenue growth. Chambers’ answer was telling. Cisco is different, he said, because the networking products the company sells increase in value as its customer base grows. That’s leveraging future customer value.

7. Get buy-in from the CEO.

When the CEO is committed the company can balance long- and short-term strategy. In an interview with Chief Executive magazine, FedEx Chairman Fred Smith said: “For most good ideas, you can get the money… That’s the problem, again, going back to the thing.

All this money went into all these enterprises and almost from the get-go you could funda­mentally graph them out into the inevitable, horrible conclusion.... Of course, a lot of it was because they weren’t really playing to customers. They were playing to the stock market.”

Playing only to the stock market is a poor approach to this game we call competition. But by following the seven rules for increasing ROC, your company can win the game every time.

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